Five key takeaways from the Banking Royal Commission for HR professionals

10/05/2019

The Banking Royal Commission’s recommendations placed a strong focus on reforming corporate culture. This focus on people, their behaviour, and the governance frameworks they act within means that HR professionals are more vital than ever.

Here are the Governance Institute’s five key takeaways:

1. The Royal Commission’s lessons for the banks, actually apply to all Australian organisations

Much of what Commissioner Hayne exposed in his investigation focused on corporate culture, and other issues connected to it, such as:

Whistleblower protection

anti-bribery and corruption measures

remuneration and other incentives that encouraged poor conduct.

Culture, ethics, and risk management are all closely linked. HR professionals all need to consider the risks that a dangerous culture can create, and how it can damage an organisation’s reputation. Major scandal can endanger an organisation’s very existence.

Again, these are not issues exclusive to the financial sector, but the Royal Commission’s investigation certainly identified some egregious examples of abuse.

2. Your organisation’s values define team culture

What shocked many at the Royal Commission was senior leaders acting directly in contradiction to their company’s own stated values.

While cultural variation can be an important driver of innovation within teams, there needs to be an overall cultural alignment attached to your organisation’s core purpose and values. This also needs to be enforced from the top.

It then needs to be threaded through all HR engagement — token box ticking, such as including printouts of company values in an induction pack doesn’t cut it.

Organisations need to live their values in every interaction. This raises the high importance of values training for all staff, and Commissioner Hayne’s commentary focused on how senior executives need to be constantly referencing and reinforcing values in their own interactions.

The Commissioner even goes a step further and outlines six ‘norms’ of conduct. This could form the basis of an ethical framework for any organisation:

Obey the law

Do not mislead or deceive

Be fair

Provide services that are fit for purpose

Deliver services with reasonable care and skill

When acting for another, act in the best interests of that other.

Some of these are not easily quantifiable, and will never cover every possible decision made on staff conduct. Discretion and advice will be required, and this is where HR professionals become key consultants to the wider business leadership.

Consider and implement reporting to the board about material incidents reported under the whistleblower policy

Review or prepare a policy on anti-bribery and corruption and, if necessary revise or implement reporting on breaches within the organisation and training on the policy

Consider and implement reporting on material breaches of the anti-bribery and corruption policy to the board and update or implement training on the policy.

4. Read the warning signs

How does the accountability framework operate in your organisation? Your performance management framework should address the ‘how’ and not just the ‘what’. More importantly, how quickly and easily does bad news rise to the board and senior management?

Here are a few indicators for HR professionals to keep an eye on as precursors to risky behaviour:

Corporate stress, which leads people to take shortcuts

Excessive focus on short-term financial targets

A tolerance of small breaches of the rules, or a tendency to push at the limits of what is permitted by the rules or regulations, which allows misdemeanour to grow incrementally

5. If you don’t make the change now — regulators and investors will force you

The relationships between culture, governance, remuneration and misconduct have been the subject of increasing attention since the Global Financial Crisis. As Commissioner Hayne notes: ‘until very recently, there has been limited overt attention given in Australia, by entities or regulators, to issues about conduct and culture’ (Final Report, p 383).

The Royal Commission has directly emboldened ASIC, AFCA, APRA and other regulators to pursue breaches more aggressively, and both major political parties have committed to funding and power increases for regulators following the election. There is now a very real risk of legal action and fines, and even jail sentences.

We are also increasingly seeing institutional investors use their clout to question organisations about culture, especially around issues such as climate change and corporate culture, as a risk to the business’ long term sustainability.

The world’s fifth largest asset manager, State Street Global Advisors, this year wrote to the boards of companies they invest in, advising that corporate culture would be their focus for the year.

Morrow Sodali, a firm specialising in corporate governance consulting and investor relations services, has already discussed similar measures in its in-house publication, The Lighthouse. They observe that culture ‘touches all industries’ and that it carries “echoes of the financial crisis and the impact it had on financial regulation.”

So whether it is regulatory scrutiny or investor scrutiny — culture change is under the microscope.

This shouldn’t be seen as a negative, but as an opportunity. HR leaders and People and Culture teams to take the lead, and advise the board and the executive team on how to build these governance and policy frameworks.

Want to learn more?

The Governance Institute’s postgraduate courses, courses, professional development events and short courses can help you develop the right governance framework that encapsulates culture, ethics and risk management, and help you implement it throughout your organisation.